Understanding Private- Sector Medicare A primer for investors Updated June 27, 2013
This presentation is intended for informational purposes only to give the reader a basic understanding of the Medicare program and the private sector options offered by Humana in conjunction with the program. The information presented is current as of the date on the cover page, and Humana has not undertaken to update this information. Additional detailed information on the Medicare program is available on the Centers for Medicare and Medicaid Services (CMS) and the U.S. Department of Health and Human Services (HHS) websites at www.cms.gov and www.hhs.gov. Users of this presentation are encouraged to also read Humana s disclosures in its Form 10-K (annual), Form 10-Q (quarterly), and Form 8-K (current report) filings with the SEC. Those documents are available via the Investor Relations page of the company s web site (www.humana.com). 2
The Medicare Program 3
The Medicare Program Administered by the Centers for Medicare and Medicaid Services (CMS), under the Department for Health and Human Services Restructured significantly via the Medicare Modernization Act of 2003 and the Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (collectively referred to as Health Insurance Reform Legislation) Includes four major components: Part A helps pay for inpatient hospital services, skilled nursing facility services, certain home health services, and hospice care Part B helps pay for doctor services, outpatient hospital services, certain home health services, medical equipment and supplies, limited Part B drugs, and other health services and supplies Part C offers Medicare beneficiaries an array of private health plan options (HMOs, PPOs, and Private Fee-for- Service plans) as an alternative to original Medicare; may also include Part D benefits Part D coverage for prescription drugs offered through private health plans 4
Types of Private-Sector Medicare Coverage Medicare Advantage Health Maintenance Organization (HMO) Preferred Provider Organization (PPO) Private Fee-for-Service (PFFS) Part D - Prescription Drug Plan (PDP) Medicare Advantage Prescription Drug Plans (MA-PD) HMO PPO PFFS Medicare Supplement (Medigap) 5
Overview of Medicare Advantage Provides Medicare beneficiaries with private health plan options (local HMOs, local PPOs, regional PPOs, and PFFS plans) as alternatives to original Medicare under Part C of the program Participants generally receive benefits in excess of those available under original Medicare, typically including reduced cost sharing, prescription drug benefits, care coordination, techniques to help identify member needs, complex case management, tools to guide members in their health care decisions, disease management programs, and wellness and prevention programs Involves an annual competitive bidding process Plans may include a Part D benefit (MA-PD) Operates with an annual enrollment period that runs from October 15 through December 7, during which beneficiaries can select their plan options for the following plan year Includes a disenrollment period that runs during January and February, during which Medicare Advantage members can disenroll and return to original Medicare and a PDP plan 6
Humana Medicare Advantage Networks HMO and PPO plans may eliminate or reduce coinsurance or deductibles on many other medical services while requiring care from participating providers. PPO plans carry an out-of-network benefit that is subject to higher member cost sharing. PFFS plans are available with or without a network. Network PFFS plans have in and out of network benefits. Partial network PFFS plans have certain services with in and out of network benefits such as laboratory services and durable medical equipment. Non-network PFFS plans have no preferred network; members have the freedom to choose any health care provider that accepts patients at reimbursement rates set by the health plan, which must be at least the same as original Medicare. Non-network PFFS plans may only be offered in geographies with less than two coordinated care plans available to beneficiaries. All plans may include copayments, coinsurance, and deductibles; benefit designs must provide at a minimum the actuarial equivalent of benefits available under original Medicare. 7
Overview of Part D Program Provides Medicare beneficiaries with prescription drug benefits under Part D of the program May be offered through MA plans or on a stand-alone basis; offered exclusively through private entities Involves an annual competitive bidding process Beneficiaries who have dual-eligibility for Medicare and Medicaid will be auto-assigned into a PDP if not already in a plan of their own selection (dual-eligibles maintain the right to switch between plans or choose a PDP themselves) Private entities accept most of the related insurance risk but some is offset by risk-sharing corridors and reinsurance subsidies from CMS 8
Defined Standard Benefit PDP There are four phases of coverage in the Defined Standard Benefit: 1. Deductible: Member pays 100% of their initial annual drug spend up to a modest amount 2. Initial Coverage Limit (ICL): After the Deductible has been met, Member pays 25% of drug spend and Plan pays 75%, up to a pre-determined total. 3. Coverage Gap ( Donut Hole ): Originally, a Member paid 100% of the drug cost in this phase, up to a more substantial pre-determined Out-of-Pocket Threshold (OOP). Through the Affordable Care Act, the donut hole is now scheduled to be phased-out with the following cost share percentages in 2020: Generics member cost share will be 25% and plan cost share will be 75% Brand name member cost share will be 25%, plan cost share will be 25% and drug company cost share will be 50% 4. Catastrophic: Once a member exceeds the OOP Threshold, Catastrophic coverage kicks-in. The Member pays a much smaller share of spend, approximately 5%, the Plan pays 15%, and CMS pays 80% of the cost. Note: For individuals that meet low income thresholds, various subsidies for both premium and cost sharing are available. 9
The Two Medicare Trust Funds 40% 3% 2% 4% 8% 1% 4% 73% 3% The Hospital Insurance (HI) Trust Fund finances services covered under Part A The Supplementary Medical Insurance (SMI) Trust fund finances services covered under Medicare Part B and Part D 13% 85% 3% 38% 23% Total HI Trust Fund SMI Trust Fund Transfers from States/other General revenue Social Security tax Beneficiary premiums Interest on trust funds Medicare payroll tax Source: Calendar Year 2012 Data Reported in 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table II.B1 10
Payments to Health Plans 11
Sources of Medicare Advantage Premium CMS base premium per member (specific to the county in which the member resides; beginning in 2012 counties are segregated into payment quartiles) Individual member risk-adjustments Member premium paid by the individual member to the health plan Quality bonus payments related to star ratings Part D risk-share computations (not specific to county) may increase or decrease total premium income 12
Medicare Advantage Premiums Quartiles CMS base premium per member is established by county Beginning in 2012 CMS began transitioning each county that was assigned to one of four payment quartiles representing base premium as a percent of original Medicare fee-for-service (FFS) rates. To minimize disruption to Medicare beneficiaries, there is a transition period to new rates of either two, four, or six years depending the pre-transition rate for each county. Per the March 2013 MedPAC report, Medicare Advantage plans are paid on average approximately 4% above FFS plans, based on 2013 rates. Quartiles 95% for the highest cost counties such as Miami-Dade, Florida 100% for counties in quartile 2 107.5% for counties in quartile 3 115% FFS for counties with the lowest costs in quartile 4 Transition Periods to New Rates 2 years If new quartile results in payment change of less than $30 per month 4 years If new quartile results in payment change of between $30 and $50 per month 6 years If new quartile results in payment change of more than $50 per month 13
Risk-Adjustments CMS base premiums are risk-adjusted to reflect the health status of the individual member Coding of individual claims affects the health risk score of individual member The risk-adjustment process Health care providers submit documentation of member claims and/or encounters to individual health plans for submission to CMS Health plans summarize and forward electronic documentation received from providers to CMS CMS uses data to calculate health risk scores and adjusts the individual health plan s standard monthly premium payment based upon the individual member s health status Approximately six to nine months into the plan year and again approximately six to nine months subsequent to the close of the plan year, CMS updates health risk scores using most recent encounter submissions and makes any necessary adjustments to plan-year premium 14
Minimum Medical Loss Ratio (MLR) Requirements In May 2013, CMS issued final rules related to the minimum MLR requirement applicable to Medicare Advantage and Medicare Part D plans mandated by the Affordable Care Act. Beginning in 2014, Medicare Advantage and Part D prescription drug plans must spend at least 85% of premiums for medical benefits each contract year. The specific regulatory compliance calculation involves certain adjustments to both premiums and medical benefit expenses as presented in plan financial statements. If minimum MLR targets are not met, plans will be required to remit payments to CMS. These payment amounts are equal to the total revenue under the contract for the year multiplied by the difference between the 85% minimum and the contract s actual MLR. If a plan does not meet minimum MLR requirements for three consecutive years, no new enrollment will be allowed in the next contract year. Plans failing to meet the minimum MLR requirement for five consecutive years will be subject to contract termination. 15
Medicare Advantage Premiums Quality Star Bonuses Rated Plans Quality Rating Quality Bonus Payments 5 star plans 2014 5.00% 2013 5.00% 2012 5.00% 4 and 4.5 star plans 2014 5.00% 2013 4.00% 2012 4.00% 3.5 star plans 2014 3.50% 2013 3.50% 2012 3.50% 3 star plans 2014 3.00% 2013 3.00% 2012 3.00% Less than 3 star plans 2014 0.00% 2013 0.00% 2012 0.00% New or Low Enrollment Plans Quality Bonus Payments New plans* 2014 3.50% 2013 3.00% 2012 3.00% Low enrollment/small plans 2012 3.00% From 2012 through 2014 new plans or those with at least 3 stars will be paid additional quality bonus payments In 2015, quality bonus payments will revert back to those proposed by the Patient Protection and Affordable Care Act of 2010 * If a company has previously contracted with CMS for other plans, the quality bonus payments for the new plan is equal to the enrollment-weighted rating of all of the company s other rated plans. 16
Sources of Payments to PDPs Payment description Average-income member Low-income member (a) Standard premium CMS pays N/A Member premium Member pays CMS pays Risk-share premium CMS pays CMS pays Low-income premium subsidy N/A CMS pays Low-income drug cost (b) subsidy N/A CMS pays Reinsurance subsidy (b) CMS pays CMS pays Coverage gap payments (c) CMS pays N/A a) Low-income member subsidies are graduated. Depending upon member income, member may have partial premium payment. b) Low-income member drug costs and reinsurance subsidies are considered deposits and therefore affect the balance sheet, but not the income statement. c) Coverage gap payments for brand name drugs will be reimbursed to CMS by drug companies. These payments are considered deposits and therefore affect the balance sheet, but not the income statement. 17
PDP Member Premiums Computation Projected PDP revenue excluding reinsurance subsidy Divided by projected risk score used in projected PDP revenue = Revenue adjusted to standard risk score of 1.00 (a) Less national bid average (b) Plus national base member premium (b) = Member premium included in PDP bid a) Revenue received will be adjusted to reflect member s actual health risk score b) Amount is estimated in original bid; bids must be re-filed with actual amounts once published by CMS to determine the impact upon the member premium 18
Annual Bidding Process 19
Medicare Advantage Annual Bidding Process Timeframe First Monday in April April and May First Monday in June June and July August September Event CMS publishes Medicare rate book and bidding instructions for the following year. Company actuarial teams evaluate data and benefit plan designs to determine bids. Companies submit bids for all MA plans to be offered the following year (separate bids for (1) Parts A & B and (2) integrated Part D). CMS reviews bids for adequacy and appropriateness of plan designs. Regional PPO benchmarks are determined by CMS based on both the bids and the Medicare rate book. Regional PPO plans bidding below the PDP benchmark adjust bids to re-allocate a portion* of savings to reduce premiums or increase benefits for Parts A & B (the remainder of savings revert to U.S. Treasury). CMS signs final contracts for upcoming year. * The portion of savings depends on a plan s Star rating used to determine quality bonus payments. The portion of savings ranges from 50% for plans with less than 3.5 Stars to 70% to plans with 4.5 or 5.0 Stars. 20
Medicare Advantage Part D Annual Bidding Process Timeframe First Monday in April April and May First Monday in June June and July August September Event CMS publishes bidding instructions for the following year. Company actuarial teams evaluate data and benefit plan designs to determine bids. Companies submit bids for all Part D plans to be offered the following year (each company must submit one bid for the defined standard plan design or its actuarial equivalent). CMS reviews bids for adequacy and appropriateness of plan designs. Average of Part D bids for the standard plan (using calculation defined by CMS in April) determines the benchmark. Bids are adjusted to reflect actual benchmarks and the related effect upon member premiums. CMS signs final contracts for upcoming year. Auto-assignment of dual-eligibles for plans below the regional benchmark (to be effective January 1). 21
Risk Sharing 22
Part D Risk-Sharing Corridors Pharmacy costs PMPM higher than the annual bid amount : 5% - 10%: CMS reimburses plan for 50% of excess > 10%: CMS reimburses plan for 80% of excess Pharmacy costs PMPM lower than the annual bid amount : 5% - 10%: plan reimburses CMS for 50% of savings > 10%: plan reimburses CMS for 80% of savings Not included in determining risk-sharing: Pharmacy costs associated with benefits in excess of the defined standard plan design Administrative expense overruns or savings * Settlements with CMS are approximately nine months after close of plan year 23
Risk-Share Accounting Computations are done by plan by region and include numerous detailed technical complexities A year-to-date analysis is performed monthly for the current year and quarterly for the prior year to determine the variance from the annual PMPM bid cost The risk-share receivable from or payable to CMS is recorded on the balance sheet with the offset to premium revenue Risk-share assets or liabilities are classified as current if within one year of the anticipated settlement with CMS Because of the exclusion of many components of income from the risk-share calculation, one can not correlate changes in risk-share receivables or payables to changes in the profitability of the related program for the company 24
Medicare Acronyms 25
Medicare Acronyms CMS Centers for Medicare and Medicaid Services, the arm of the Department of Health and Human Services that administers the Medicare program HMO Health Maintenance Organization MA-PD Medicare Advantage Prescription Drug Plans PFFS Private Fee for Service PMPM Per Member Per Month PPO Preferred Provider Organization 26
Follow-Up Questions Regina Nethery Vice President of Investor Relations Phone: 502-580-3644 E-mail: Rnethery@humana.com 27